Sunday, March 30, 2008

Senator Obama's Economy

But the American experiment has worked in large part because we have guided the market's invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest. We have done this not to stifle - but rather to advance prosperity and liberty. As I said at NASDAQ last September: the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well being of American business, its capital markets, and the American people are aligned.

I think all of us here today would acknowledge that we've lost that sense of shared prosperity.

I'm not liking the sounds of this. America works because "we have guided" the invisible hand? Who is this "we?" Does he mean because government has guided the invisible hand? I suspect that is what he means, although he doesn't seem to me to specifically state what the higher principle is that has been used by government to guide the invisible hand.

I don't think we've lost the sense of prosperity. I'm not sure about the "sense of shared prosperity," maybe because I'm not sure what he means by this phrase. But "sense" seems to me a lot like "preference" or "utility." That is, "sense" is something we can't easily see or measure, which makes it a convenient choice for political rhetoric.

But, let's take a look at his explanation for why our "sense of shared prosperity" has been lost.

This loss has not happened by accident. It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.

I'm not sure what he means by a market that favors this street over that street. But, then, I like to think of markets as exchange, and I like to think of exchange as resulting from the voluntary choices of a buyer and a seller. Of course, an exchange cannot favor or disfavor anything, not even this street over that street.

Moving on:

Nor is this trend new. The concentrations of economic power - and the failures of our political system to protect the American economy from its worst excesses - have been a staple of our past, most famously in the 1920s, when with success we ended up plunging the country into the Great Depression. That is when government stepped in to create a series of regulatory structures - from the FDIC to the Glass-Steagall Act - to serve as a corrective to protect the American people and American business.

I'm not buying his history lesson in this speech either. Admittedly, I'm not an economic historian, and I didn't stay at a Holiday Inn Express last night either (I'll bet this is true for Senator Obama as well). But one of the things I learned about the economics of the Great Depression was that the research of Milton Friedman found that government's monetary policy was the explanation for why this recession turned into the Great Depression. Further, Amity Shlaes explains in THE FORGOTTEN MAN that when the "government stepped in to create a series of regulatory structures" those regulatory structures prolonged (not ended) the Great Depression. My students learn to suspect this as well when they study Supreme Court opinions from this period in my course Constitution and the Economy and discover numerous instances in which the policies of FDR reduced output at a time of "depression."

I also want to add that the "series of regulatory structures" referred to by Senator Obama were generally regarded by the Supreme Court at the time as unconstitutional, at least initially. I like to think our Constitution as it was written protected individual economic liberty and that these regulatory structures were seen as unconstitutional then because they infringed upon individual liberty. Unfortunately what emerged from politics at the time was FDR's scheme to pack the Supreme Court and the "switch in time that saved nine." Certainly from that time on, the Suprme Court's view of the Constitution became more and more a view that I think is fairly described as the lost constitution and which is discussed by Randy Barnett in RESTORING THE LOST CONSTITUTION.

Once again the Senator moves on to something that I'm not at all sure what he means by what he says:

Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we've excused and even embraced an ethic of greed, corner cutting and inside dealing that has always threatened the long-term stability of our economic system. Too often, we've lost that common stake in each other's prosperity.

I don't think the Senator is clear here on who he is criticizing, and I don't think "that common stake in each other's prosperity" is something that can be lost because I think the "tendency to truck, barter and exchange" (to borrow from Adam Smith) is an inherent part of human nature. It seems to me that as long as government does not intervene with regulations that the "common stake in each other's prosperity" works out in exchange after exchange really rather well.

Now if Senator Obama means to say that the "we" who have lost a sense of understanding "that common stake" are our political leaders, then I might just be with him on this one. I do think much of Washington fails to understand (the basic economics) that exchange is voluntary and therefore beneficial for both buyer and seller (the common stake in prosperity), and that government's regulations bring force to bear upon the common stake in prosperity. When politicians overlook this stuff of basic economics, and when the Judicial branch of government fails to enforce the Constitutional constraints against government's infringements of economic liberty, then rent seeking prospers at the expense of "that common stake." But, my guess is that Senator Obama is not saying what I would say: "Government and rent seeking is the problem, not that answer."

I suspect Senator Obama means to say that the answer is to better use government's force in our lives and our individual daily economies. At least that is how I understand this:

Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform - to foster competition, lower prices, or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. . . .

Or, consider this as well:

. . . . This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment. . . . .

In other words, it is the greedy corporate rent seekers (demanders), not the greedy Washington politicians (suppliers of rent seeking), who are to blame for our "failing" system of political economy.

What follows in his speech seems to be illustrations of his idea that "the rules that govern" the economy must be changed as the economy changes. I suspect this is an easy idea (or principle as I think he would say) to latch onto. In my view, this idea is of course quite the opposite of understanding that exchange, not force that is directed by government to intervene in exchange, is the foundation of "that common stake in each other's prosperity." When the Senator finishes with the list of illustrations he gets to the following:

Our history should give us confidence that we don't have to choose between an oppressive government-run economy and a chaotic and unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. But we can do so only if we restore confidence in our markets. Only if we rebuild trust between investors and lenders. And only if we renew that common interest between Wall Street and Main Street that is the key to our success.

Of course this all sounds just fine on the surface, but I'm still nervous by his use of "we" in the context of restoring confidence and rebuilding trust. I already have great trust and confidence in "our markets," and I haven't lost that confidence because of any of the illustrations he draws upon. Instead, I see in his illustrations, and I see in our history, reason to conclude that "our markets" do just fine without government intervention. I'm nervous about his use of "we" because I'm pretty sure he means to say we have to involve government even more in our markets to restore trust and confidence, and I think it is largely because of government's intervention in the past that he can mistakenly assert today that we've lost trust and confidence in our markets. It seems he is saying that for all the ills he finds in our economy the answer is really more government policy so that "we" can try to fix the very problems "we" created with earlier government policy.

Well, the Senator's speech goes on for quite a bit longer, but, it seems to me that once I get to the end I've pretty much already covered with my comments above the Senator's view of our system of political economy. At the end of his speech he repeatedly refers again and again to "we" this and "we" that. While it sounds like by "we" he means all of us, it is pretty clear to me that he means "we" in the national government will fix all these ills for you. Or, perhaps I can say that Senator Obama's view of our economy is one in which he will try again and again (with his colleagues in Washington) to use government's force to intervene in our own individual economies to fix the problems that have now emerged from the earlier interventions of government policy. Of course, as you know by now, my view of government and prosperity is pretty much the opposite of the view I find in the Senator's speech.